The proposals set out in EMU: Getting the End-Game Right (the seventh in CEPR’s influential annual series, Monitoring European Integration) will be officially adopted by ECOFIN on the weekend of 1 May 1998. The report was published by CEPR, the pan-European research network, on 21 March 1997 and written by a group of distinguished European economists with an established track record: they had been the first to analyse how German unification would lead to irresistible pressures on the ERM in the early 1990s.

Their 1997 Report warned that extant proposals for conversion to the euro risked another fiasco for two reasons: unnecessary commitment to exchange rate bands during the remainder of 1998, and unnecessary ambiguity about terminal conversion rates of national currencies at the end of 1998.

The authors set out an alternative proposal, explaining how the decision about bilateral conversion rates between Ins could be brought forward to the date the Ins themselves were chosen, and how these conversion rates could and should be based on existing ERM parities. This will reduce uncertainty about conversion rates and the temptation to manipulate them during the interim period; nor would there then be any need for narrow exchange rate bands, potentially vulnerable to speculators, during the interim period.

Publication of the 1997 Report quickly changed official strategy for managing the transition to the euro, by revealing dangers inherent in the strategies that had been floated up to that point and by providing a concrete and reliable alternative. The report demonstrated that, Ireland apart, existing central parities would serve as an excellent basis for eventual conversion rates; the recent and unopposed revaluation of the Irish punt, moving the official parity to a level more appropriate for conversion to the euro, provided further evidence that official thinking had taken the CEPR proposals fully on board. The formal decision to adopt this strategy for transition is therefore no longer any surprise.

Details of the Begg, Giavazzi, von Hagen, Wyplosz proposal are as follows:

• Pre-announce bilateral rates for Ins as soon as possible and then use floating, failing which very wide bands, to proceed to these fixed end points. Provided conversion rates are credible, market rates will steadily converge on conversion rates without any need for intervention while EMU is still some way off.
• Complete credibility of bilateral conversion rates requires, if necessary, the prospect of substantial intervention on the last day before EMU to enforce these rates. Any monetary effects can automatically be undone as the first act of the new European Central Bank. A national central bank faces no inflation risk in bailing out other currencies on the last day; there will no time for its economy to be affected before policies are reversed. Being credible, such intervention is unlikely to be needed.
• The proposal goes further: it specifies how pre-announced conversion rates between Ins should be determined: they should be based on the central parities ruling when Ins are first confirmed. The report shows that currently such rates pose surprisingly few problems for the competitiveness of EU members.
• This in turn suggests a natural way in which to handle the fact that some EU members will not be in the first wave of EMU. They should be required to join at exchange rates, relative to the euro, based on central parities at the time their EMU membership is accepted. The Maastricht requirement of no devaluation for two years prior to EMU entry would remain in force.
• This maintains the principle of equal treatment, reduces avoidable uncertainty about future rules for admission, but recognises the reality that countries deemed to have failed adequately to converge may then face huge pressure for immediate depreciation. Requiring their eventual entry at rates based on 1997 parities would impose years of deflation and would therefore lack credibility.

CEPR is a network of over 450 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. CEPR helps its Research Fellows to develop projects, obtain their funding, administer them and disseminate their results. The Centre’s research ranges from open economy macroeconomics to trade policy, from the economic transformation of Central and Eastern Europe to regionalism in the world economy. The views expressed in the discussion meeting are the authors’ own.

Monitoring European Integration is an annual Report published by CEPR. The seventh Report was prepared by a team of CEPR Research Fellows, comprising Professor David Begg (Birkbeck College, University of London, and CEPR), Professor Francesco Giavazzi (IGIER, Università Bocconi, and CEPR), Professor Jürgen von Hagen (Zentrum für Europäische Integrationsforschung, Unviersität Bonn and CEPR) and Professor Charles Wyplosz (Graduate Institute for International Studies, Geneva, and CEPR).

The German Marshall Fund of the United States once again supported the preparation of this Report. The underlying research has benefited from support from the UK Foreign and Commonwealth Office. The views expressed in this Report are those of the authors, writing in their personal capacities. Neither the funders nor CEPR take any responsibility for these views, and CEPR takes no institutional policy positions.

EMU: GETTING THE END-GAME RIGHT
Monitoring European Integration No. 7
David Begg, Francesco Giavazzi, Jürgen von Hagen and Charles Wyplosz

ISBN 1 898128 26 X –– £10.00 / $14.95

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